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How online lenders use technology to approve business loans

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What are the advantages of borrowing online from tech-savvy lenders?

Plenty of small businesses need to borrow money. It’s a normal and necessary part of the small business life cycle, and no matter why your business needs the extra boost in capital, there are lenders out there that can serve you. These days, that means online applications and quick underwriting processes. Sometimes that means that brick-and-mortar banks are left behind.

What benefits do online lenders offer?

Although many banks and other traditional lenders are switching their services to the Internet, you’ll still have to wait while your loan is processed, and your business may suffer in the interim. Compared to typical bank loans, online lenders offer a range of features to borrowers and build a relationship that you can rely on for years to come.

  • Faster loan preapproval, usually within minutes.
  • Funds can be deposited into your account within a few days.
  • Potentially lower interest rates and simpler fee structures.
  • Paperless online application and 24/7 service.
  • Competitive terms, benefits and loan features.

Compare the turnaround times of these online business loans

Online business loans are known for faster processing and funding times. Compare the turnaround times of these top online business loan providers.

Provider Turnaround Time Min Amount Max Amount Requirements
LoanBuilder, A PayPal Service Business Loans As fast as one business day $5,000 $500,000 Annual business revenue of at least $42,000, at least 9 months in business, personal credit score of 550+. Go to site More
LendingClub Business Loans As little as one week $5,000 $300,000 2+ years in business; $50,000+ in yearly sales; No bankruptcies or tax liens; At least 20% ownership of your business; Fair or better personal credit Go to site More
OnDeck Small Business Loans As fast as 24 hours $5,000 $500,000 Must have been in business for at least one year with annual revenue of $100K+. Must have a personal credit score of 500+. Go to site More
Kabbage Small Business Line of Credit Next business day $500 $250,000 Must have been in business for at least 1 year. Revenue minimum is $50,000 annually or $4,200 per month over the last 3 months. Go to site More
Lending Express Business Loan Marketplace $5,000 $500,000 At least 3 months in business and $10,000+ in monthly revenue. Your business might also qualify if it's been in business at least 6 months with $3,000+ in monthly revenue. Go to site More
National Business Capital Business Loans Several business days $10,000 $5,000,000 Your company must have been in business for at least 6 months and have an annual revenue of at least $180,000. Go to site More
BizLoans.io Business Loan Marketplace $20,000 $500,000 Must have good credit and at least 6 months in business. Go to site More
Fora Financial Business Loans As little as 72 hours $5,000 $500,000 Business age 6+ months. Monthly revenue $12,000+. No open bankruptcies. Go to site More
Excel Capital Management Small Business Loans Varies by loan type Varies by loan type Varies by loan type Your business must operate in the US, be at least 1 year old and have monthly revenue of $15,000+. Go to site More
Balboa Capital Small Business Loan Within one or two business days $2,500 $250,000 Must make $300,000 in annual revenue and be established for at least one year prior. Go to site More

How do online business loans compare to bank loans?

It may seem like every online lender offers the same thing, but that doesn’t make it true. Like any loan option, compare the features of the loan and the rules set by the lender to make sure you’re getting the best deal. The brands listed below have some features in common, giving you a solid way to kick off the comparison process.

  • Higher approval rates than banks. Online lenders look at real-time business health rather than analyzing a few data points from your credit report. This is a more accurate way of calculating risk , allowing them approve more loans.
  • Quick processing time. Many lenders offer fast approval by looking directly at your business data and bank information. Rather than filling out forms or answering a lot of questions, you connect your business accounting data. The lender can use the information it needs.
  • Reduced fees and transparent fee structures. Bank loans tend to come with an early repayment penalty, but the majority of alternative lenders waive this fee. As they’re smaller institutions that use technology to approve loans, this translates into less overhead costs and lower fees for you.
  • Varied products. Whether you’re after a short-term business loan, a line of credit, a larger long-term loan or any other financing options, online and technology-based lenders have products available.

How do online business lenders approve loans so quickly?

Some bank lenders might spend hours questioning you and asking for documentation, take several days to process your application and weeks to actually get you the money. By comparison, newer technology-focused lenders can get it done in minutes and provide money within a few days.

There’s no secret here. Technology lets these lenders do it faster. Because they already have many existing systems in place, some big banks can’t easily integrate this new technology and so they are left doing things the old way.

When you borrow money from a bank, you’ll be assigned a case manager. This person will look over your finances to try and get a sense of your business’s strengths and needs. After checking both your personal and business credit report, the bank decides whether to approve you for a loan. Overall, the process can take a few days or weeks.

When you borrow money from a technology-focused lender, your business data is plugged into an automated system and asks you questions about your business through an online form. Your data is assessed by the online system to make a decision as to whether to approve you and if so, for how much.

Why are newer lenders’ approval rates higher?

Many online business lenders tout their high rate of loan approval, even for unsecured or no doc loans. In the face of financial downturns, banks tightened their business lending requirements and have yet to fully loosen them. Small business lending is risky compared to a bank’s other revenue streams, and implementing new technology to approve these loans is costly and time-consuming. To compensate for these factors, banks have stricter lending requirements.

This is where online lenders step in. Because they already have the technology in place, it’s easier to approve businesses that may not stand a chance when applying at a bank. Here’s a few reasons why online lenders have the edge over banks:

  • Collateral. Unlike banks, online lenders have a wide selection of unsecured loans so you don’t have to supply collateral your business may not have.
  • Industry. Banks use your industry to determine your risk level while online small business lenders tend to look more closely at the individual strengths of your business.
  • Credit report. Banks consider both your personal and business credit history when determining your approval. By contrast, online lenders can look at actual real-time business data, vendor payments and even social media presence to gauge your business strength, placing less emphasis on your credit report.
  • Expenses. Online lenders rely on technology to underwrite loans, unlike banks which often have a rigorous approval process. This means banks will not only take longer, but will spend more money processing your application. That translates to higher rates and a lower chance of approval.
  • Time in business. Newer businesses are significantly more likely than established ones to default on loans, and some banks have blanket requirements – such as needing several years of business history – which immediately rules out lending to startups. Online lenders have their own systems for assessing a business’ health and will often lend to new businesses.
  • Return on investment. It costs banks about the same amount to process a $1 million loan as a $10,000 loan. Most business loans are for smaller amounts, but banks have little incentive to focus on these compared to the larger and more profitable sums. This makes it more likely that a bank will simply decline your application.

In short, banks have higher overhead costs when considering loans, and small business lending only makes up a tiny portion of their total revenue. This makes these loans riskier and banks are likely to turn down anyone who doesn’t have a strong application with collateral to put up against the loan.

By comparison, online small business lenders have very low overhead costs and many specialize in business lending. These lenders use automated approvals processes because they’re fast and accurate. This translates to more approvals so you have a better chance of getting the loan your business needs.

business-loans-tech

How do big bank rates and fees compare with online lenders?

It depends on your business and what type of financing you’re after. The number you receive varies between banks and lenders. Generally, you can expect lower interest rates with secured bank loans, similar interest rates for unsecured bank loans and unsecured online business loans, and fewer fees with online business loans.

Because they accommodate riskier clients and provide more benefits, you can typically expect higher costs overall from online lenders than from banks. It’s important to remember that interest rates and fees are usually personalized for your circumstances depending on the lender, and you should work out the total cost of a loan before borrowing.

You should also be aware of any special rates and fees offered. Each online lender will do things differently, and depending on your needs, these costs might be more or less expensive than traditional fees and interest rates.

When comparing, keep in mind that annual percentage rate (APR) will be the best way to examine the total cost of a loan. Although one provider may have a lower interest rate, its fees could make it more expensive than a similar loan with a larger interest rate. Take your time finding the right loan, and consider contacting an accountant to help you find a good loan option.

Should I get an online business loan or a traditional bank loan?

The ideal loan for your business relies on your unique circumstances, so every loan should be considered critically. Ideally, you, your business partners and accountant should weigh the pros and cons of your options and weigh the cost benefit before signing a contract.

However, consider these guidelines as a starting point:

  • If you run a financially stable and well-established business, you may prefer a bank loan.
  • If you need a low or no document or unsecured small business loan, or have a rocky personal or business credit history, then online business loans might be the way to go.
  • If you need money within days or even hours rather than weeks, online business loans may be your quicker option.
  • If you want special options for repayment plans or have more specific loan requirements, then online business loans from some lenders may offer this flexibility.

Bottom line

Online lenders are filling the gap for small businesses that may not have the credit to qualify for a traditional loan. By using modern technology, lenders have reduced the time it takes to get approved and have your loan deposited into your account. These are generally more expensive, but if your business needs a loan, comparing your options will help your business stay ahead of the game.

Frequently asked questions

Image: Shutterstock

Elizabeth Barry

Elizabeth is an editor for finder.com.au specialising in personal finance and fintech. She enjoys reading PDSs so you don’t have to.

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